Congress and the president passed the most sweeping tax law overhaul in a generation at the end of 2017. Let’s take a look at how the tax benefits of homeownership have changed and how the new law will affect you.
Tax deductions before and after.
The most significant change for homeowners affects the deductibility of some costs of home ownership. In the past, many homeowners have itemized their deductions, enabling them to deduct expenses such as the mortgage interest they paid and their state property taxes. But the new law nearly doubled the standard deduction. It jumped from $6,500 per single filer and $13,000 for married couples filing jointly to $12,000 and $24,000, respectively. That significant increase means that it may now make more sense for some homeowners to claim the standard deduction. These taxpayers will lose a major tax benefit of home ownership.
Limits on home-related itemized deductions.
The new tax law limits the deductibility of home mortgage interest in a second way. Before, the amount of a mortgage for which you could claim the interest deduction was $1 million. Beginning with your 2018 tax return, however, this figure is capped at $750,000 for new loans. Loans existing before December 15, 2017 are still subject to the higher cap. The same is true for refinanced home mortgages that don’t increase indebtedness.
Another significant change is that taxpayers can now claim a deduction for only $10,000 in combined property taxes, state and local sales taxes and state income taxes. This could be a significant limitation for many, prompting taxpayers who previously itemized to take the standard deduction instead.
Interest on home equity loans, lines of credit and second mortgages are now deductible only if the funds were used to improve the home. This interest is no longer deductible where the loan was used to purchase a car or pay off other debt. Again, these changes do not apply to loans existing before December 15, 2017.
The new tax law eliminates the deduction for casualty losses to homes caused by events like storms and fires. The exception is where the event that caused the losses is later declared a disaster by the president. And you can no longer deduct out-of-pocket moving expenses you incur for a job relocation, unless you’re in the military.
Some tax law provisions remain the same.
Fortunately, the new tax law didn’t change everything related to home ownership. The exclusion for capital gains on the sale of your primary home remains the same. You’ll pay no taxes on up to $250,000 in profit if you’re single, $500,000 if you’re married. Landlords can still deduct an unlimited amount of mortgage interest and property taxes on their rental property. And if you itemize, you can still deduct all of the prepaid interest you paid on your mortgage in the year you paid it.
Related – Tax Benefits of Homeownership
